Hedge Fund Manager’s Guide to Choosing the Right Technology Partner

Technology is driving huge changes in the financial services industry. In the alternative investment space, according to the Ernst & Young - 2017 Global Hedge Fund and Investor Survey, in the coming year, 50% of hedge fund managers have plans to implement something innovative with their technology investments, and 40% said that they plan on automating manual processes. With constantly evolving investor demands and regulatory requirements, there is increasing pressure on hedge fund managers to use innovative ways to increase alpha.

One of the ways hedge fund managers are choosing to increase their alpha is by incorporating technological upgrades to various business functions. These functions range from front-office, to middle and back office operations, to risk and portfolio management, compliance requirements and reporting, and various other functions. This makes it essential for hedge fund managers and their Chief Technology Officers to choose the right technology partner in order to help them implement these technological upgrades and changes. How do you know you are making the right choice? What kind of technological skills should you be looking for? How do you go about accessing these skills? How important are soft skills? Let’s outline some of the things you should be keeping in mind while evaluating potential technology partners to make sure the right one is chosen for your hedge fund.

Technical Skills & Experience

When it comes to technical skills and experience, there are two different approaches to this very important point. If you have already invested in certain software and technology ecosystem within your hedge fund, start by asking your potential technology partner whether they have knowledge and experience in a specific ecosystem of software, programming languages, database server skills, and operating systems.

If you are starting from scratch, and you have not previously vested interest in specific software and technologies, you should be asking yourself which software and technology ecosystem should you be aligning your hedge fund with. This is a big decision, and should not be taken lightly, as once you are vested in a set of technologies, most likely you will be sticking with them in the future, as the cost of switching technologies and talent is quite high. For example, should you be investing in using open source software and technologies as a starting point, and build your custom, proprietary solutions on top of these open source software and technologies? Most common open source software and technologies range from UNIX or Linux based operating systems, with open source software programming languages, like Java and Python (data science), in conjunction with MySQL relational database and MongoDB for big data projects. On the flip side, you could align your hedge fund towards a specific software vendor like Microsoft, and use Microsoft based technologies likes .NET, Visual Basic, C++, MSSQL Server for database, and Microsoft Azure Cloud Computing Platform & Services.

You and your CTO should have done some research into this before evaluating a potential technology partner. In general, our recommendation is to be wary of technology partners that claim they are experts in all technologies in the market or are trying to sell you the next flashy, “cutting-edge” technology. This usually means that they do not specialize in any of them. This also hints that they have junior-level, inexperienced developers working on their teams. The technology partner should also make the effort to understand your hedge fund’s specific needs and what your plans are before making any recommendations. If a technology partner is eager to push certain software and technologies to you before understanding your requirements, that is usually not a good sign.

Domain Knowledge & Expertise

As most people working in the alternative investment space know, this is a fast-paced environment, where domain knowledge of financial products, how the capital markets operate, what the various regulatory requirements are, and other very specific niche industry knowledge and experience is paramount. This should also be true for your technology partner. We would recommend working with a technology partner that specializes in providing software and technology solutions to the alternative investment industry. This is important because the more they understand the workings of the alternative investment space, the easier it will be for them to understand your business, regulatory, and other requirements, and deliver the most appropriate solution for your hedge fund. This will mean that you and your team have to spend less time explaining and performing knowledge transfer of key industry specific concepts, including understanding of financial products, regulatory, and other requirements.

To take this notion a step further, we believe having prior experience in implementation technology solutions within the alternative investment space should be a requirement. This provides you with the confidence that the vendor is able to successfully deliver projects with similar scale and scope requirements.

Soft Skills

In addition to having proven technical skills and domain knowledge, one of the factors that might help you filter out technology partners is their soft skills. You will be closely working with this technology partner on an ongoing basis, who will act as a trusted advisor for your hedge fund. It is important that they possess certain soft skills. We recommend looking for soft skills like communication (listening and speaking) skills, being able to co-operate and work with your team, and their ability to show flexibility. In addition, you should also be looking at proof of excellent problem-solving abilities and resourcefulness, their ability to take critical feedback, and adapt accordingly. Creative thinking and ability to provide multiple possible solutions based on time and budget restrictions are also important soft skills to have.

Physical Location (Onshore Vs Offshore)

Most hedge funds have proprietary model and trading methods that they incorporate that differentiates them from other hedge funds. In addition, there are strict regulatory requirements to protect critical, sensitive client personal and financial information. Keeping these requirements in mind, we would recommend working with an onshore technology partner for multiple reasons. Having a technology partner working under the same legal jurisdiction allows you to know that your Intellectual Property (IP), client data, and other sensitive business information is legally protected. In addition, having a technology partner that does not have language barriers, and who understands and has the same work culture is important when you are working in tight deadlines with little room for mistakes. Working with onshore teams leads to excellent understanding of requirements, with no language or communication gaps. Just as important, proximity also allows for the technology partner to be able to personally visit with your team to understand requirements and other important details about the project and scope. This leads to closer collaboration and much better results in the end.

Company Size & Flexibility

As a hedge fund manager or the CTO of a hedge fund, you should also consider whether you would prefer working with a bigger company or smaller firm. Both have their own pros and cons. For example, a smaller firm will usually be more agile and flexible to your changing needs and requirements. They also have a flatter organization structure, which allows them to make faster decisions with less number of stakeholders involved. Smaller firms also have fewer clients, which means they are able to better focus on the handful of important clients, and you are not going to be just one of tens or hundreds of clients. On the flip side, working with a bigger firm means they might have better and more refined processes, methodologies, and standards in place. Also, larger companies usually have to ability to provide better training to their employees.

In this article, we discussed some of the factors a hedge fund manager or the CTO of a hedge fund should consider when selecting the right technology partner. Hedge funds should use this document as a framework when researching a technology company as a potential partner.